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Homebuilder Sentiment Tanks… Again

As mortgage rates remain elevated relative to 2021 levels but housing supply remains thin, NAHB’s Housing Market Index fell again this month, reaching the lowest level since May of 2020. Last month, the index posted its second largest month over month decline, and following this report, the index has fallen by 18 points over the last two months, the third largest two month decline on record, falling just short of April and May of 2020.  Click here to start a two-week trial to Bespoke Premium and receive our paid content in real-time.

Housing Market

The NAHB Housing Market Index has now declined for eight consecutive months, which is tied for the longest monthly losing streak since the index’s inception in 1985.  The only two other periods with an equal number of monthly declines were the eight months ending in October 2007 and before that September 2006. As most Americans remember, these periods were followed by precipitous declines in home values. Interestingly, the NY Post reported that Google searches for “sell my home fast” spiked by 2,750%.

Homebuilding Declines

All of the sub-indices within the report fell as well, indicating broad weakness. Apart from Future Sales and sentiment in the Western region, all of the other sub-indices experienced declines that were in the bottom 5th percentile of all periods. However, the current readings are not nearly as negative. Future sales and traffic are in the 18th and 23rd percentile, but the Northeast is still in the 63rd percentile. Although the current readings aren’t as low as the readings leading up to previous recessions, it is difficult to be positive given the current trends.

Regional Housing Performance

As shown above, no geographic region has been safe from the plunge in sentiment, but the Northeast has held up better than the others. Over the last eight months, the West, South, and Midwest regions have seen their largest eight-month declines in the index on record, while the decline in the Northeast is the third worst on record.  Click here to start a two-week trial to Bespoke Premium and receive our paid content in real-time.

Regional Housing Charts

The stocks most affected by these trends – homebuilders – struggled during the sustained sell-off between the end of 2021 and mid-June, but have recovered by over 28% relative to the lows. However, the ETF is still down over 22% relative to the highs. The recovery might be due to the fact that much of the negativity has been priced in, historically low valuation multiples, and a pullback in interest rates. The chart below shows the performance of the SPDR S&P Homebuilders ETF (XBH). As you can see, XBH has broken its downtrend and has been moving consistently higher carving out what might be a new uptrend.

XBH Chart

Western Wobbling in Homebuilder Sentiment

As the national average for a 30-year fixed rate mortgage has risen to and remained above 5%, homebuilder sentiment has been reversing its pandemic gains.  The NAHB’s monthly homebuilder sentiment index dropped 2 points in April to 77.  That was the fourth decline in a row bringing the headline number to the weakest reading since September of last year.  That is also now only one point above the December 2019 pre-pandemic high.

Housing Market Index

The decline this month was mostly driven by a decrease in traffic. That index dropped 6 points to 66 which is the weakest level and the biggest one-month decline since last August.  Meanwhile, present sales dropped 2 points for the second month in a row. On the bright side, future sales actually ticked up 3 points to snap a three-month losing streak.  That being said, the current level of this index is much less elevated within its historical range compared to the others.

NAHB Housing Market Index

Geographically, there are some large divergences in homebuilder sentiment.  For starters, the Northeast showed the most impressive improvement with the index rising 9 points month over month.  Whereas last month it was the lowest within its respective historical range, today it is the most elevated.  The South also saw an improvement as this region has perhaps been the most stable across the pandemic years. The West and Midwest were other stories entirely in April.  The Midwest experienced its second-largest decline on record behind the 42 point drop in April 2020 and is now at the lowest level since June 2020.  Meanwhile, the West fell 7 points. That also was the biggest drop in two years though the index saw an even lower reading as recently as last September.

Housing Market Sentiment

As homebuilder sentiment drops, so too have homebuilder stocks.  The iShares US Home Construction ETF (ITB) — which tracks the space — has been falling sharply since peaking around the turn of the year.  Click here to view Bespoke’s premium membership options.

US Home Construction ETF (ITB)